Net foreign exchange earnings for export-oriented units must be computed on a financial-year basis under the policy and monitoring scheme.

For a 100% export oriented unit, the five-year block for computing net foreign exchange earnings must be read in harmony with the Foreign Trade Policy and the annual monitoring guidelines. Although the policy speaks of cumulative calculation from commencement of production, the monitoring framework is tied to financial-year cycles, quarterly reporting, annual review and action on completed years. On that construction, the relevant block begins with the financial year in which production commenced, not with a broken period before that year. The challenge to the penalty therefore fails.

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Issues: Whether the five-year block for computing net foreign exchange earnings of a 100% export oriented unit must commence from the date of commencement of production or from the beginning of the financial year in which production commenced.

Analysis: Para 6.5 of the Foreign Trade Policy 2004-09 provides that net foreign exchange earnings are to be calculated cumulatively in blocks of five years starting from commencement of production. The monitoring guidelines in Appendix 14-I-G, however, tie annual review, show-cause action, and penal action to financial-year based monitoring, quarterly reporting, and completed years. Reading the policy and the guidelines together, the computation of the five-year block has to be aligned with the financial year immediately following commencement of production, rather than a broken period preceding the start of that financial year. A literal reading of the policy clause does not override the scheme of annual monitoring embedded in the guidelines.

Conclusion: The relevant block period is financial-year based and not anterior to the commencement of the financial year. The challenge to the penalty therefore fails.

Ratio Decidendi: Where the policy governing export-oriented units prescribes five-year cumulative net foreign exchange earnings but the monitoring framework operates on financial-year cycles, the block period must be construed in harmony with the monitoring scheme and computed from the financial year in which production commenced.

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